CFTC and SEC Propose Joint Guidance on Treatment of Energy Capacity Contracts

Bob Zwirb Commentary by Bob Zwirb

The SEC and the CFTC proposed joint guidance relating to the appropriate treatment of certain peaking supply and capacity contracts.

The proposed guidance is meant to address circumstances in which these contracts should not be considered "swaps" for the purposes of the Commodity Exchange Act ("CEA").

The CFTC proposed that certain capacity contracts in electric power markets and certain natural gas contracts, known as "peaking supply contracts," should not be considered "swaps" under the CEA, because they are examples of customary commercial arrangements - as described in the final rule defining the term "swap." In particular, the CFTC pointed out that the contracts: (i) are entered into in response to regulatory requirements, (ii) are necessary to maintain reliable supplies, and (iii) facilitate storage or transport considerations that arise in the course of the normal operation of at least one party's business.

Comments on the guidance must be received thirty days after the date of publication in the Federal Register.

Commentary

Bob Zwirb
Bob Zwirb

In a statement accompanying the release, CFTC Chair Massad noted that the guidance will "clarify the treatment of contracts used by many businesses with respect to the supply and delivery of electric power and natural gas" and complement the CFTC's final rule regarding Trade Options, both of which will reduce burdens on end-users and allow them to better address commercial risk. However, the CFTC provided this guidance in a way that preserves its future discretion, thus making it difficult for market participants to apply it in similar circumstances, but different commercial contexts. For example, the CFTC emphasized that its evaluation is based on a "facts and circumstances" test that eschews a "bright line" for determining whether a particular arrangement is a swap, and further that it "does not intend that the proposed guidance herein would affect the interpretation of when an agreement, contract, or transaction with embedded volumetric optionality would be considered a forward contract."

The ongoing refusal of the regulators to provide guidance beyond "facts and circumstances" on which market participants can rely is fundamentally inconsistent with the notion that citizens have a right to know the rules to which they are subject.

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